TD Cowen: 20th Anniversary Quarterly Rail Survey Says …

Our survey is comprehensive and covers a broad range of industrial and consumer industries, among others (see chart below). “Manufacturing”; “Transportation”; and “Logistics” comprised the largest percentages of participants. Shippers completing this survey had approximately $16 billion of transportation spend.

Pricing Continues Downward Trend, Below 5-Year Average

Rate hike expectations for the next 6-12 months came in at 3.1%, down 10bps vs. our second-quarter survey, and below the survey’s five-year average of 3.7%. Prolonged industrial softness and an OTR market that has yet to see any signs of life continue to pressure the overall freight market.

Shippers Would Move approximately 3% of Carload and IM Freight to Rails if Transcon Service Was Offered

We asked shippers how much freight they would move to the rails if a single-line network was offered. On the carload side, 46% would move none, 31% of shippers answered in the 0%-5% range (the most frequent response), and 15% of shippers answered in the 5%-10% range, while 8% see shifts beyond 15%. On a weighted average basis, 3% of freight is contemplated to be shifted at this time. For intermodal, 41% would move none, 36% would move 0%-5%, and 13% would move 5%-10%. On a weighed average basis, a similar 3% of IM freight could move. We acknowledge that rails have not yet marketed this service to shippers yet and believe this figure could potentially move up significantly as this service is rolled out and matures.

A slight majority of shippers (57%) do not intend to participate in comments with the Surface Transportation Board review. Of those that do, however, three times as many intend to oppose the merger than support it. Only 10% intend to endorse the Union Pacific-Norfolk Southern merger. As we have previously written, the STB has historically offered little concessions to shippers (or other Class I’s) formally through the review process and typically agreements have been reached independently between affected shippers and the relevant rails. The largest concern shippers have (75% of responses) is that upon a rail merger, monopolistic practices will be implemented. However, we would also expect support for this merger to grow over time when UN-NS offers concessions to the shipping community in exchange for support.

Growth Expectations Continues To Worsen, Macro Skews Negative

Shipper estimates of business growth fell to 1.2%, which stepped down again vs. last quarter and now sit at COVID lows. 66% of participants are less confident in the economy vs. 61% in our second-quarter survey. Confidence and growth expectations remain below survey averages, and our channel checks align with the survey results that the industrial economy continues to worsen.

Thoughts Into Rail Earnings

Survey results are a near-term negative for the U.S. rail group as pricing continues to decelerate and sits below the survey average. Business growth expectations fell sequentially to levels not seen since 2020 during COVID, and economic confidence runs well below the survey average. We lowered estimates for both of the eastern rails, while modestly raising estimates for UP (coal, IM) in our concurrently published preview, though acknowledge rail earnings will likely be dominated by M&A discussion despite diverging third-quarter operations.

SURVEY QUESTIONS

Question 1: How Much Of A Blended Base Price Increase Do You Anticipate Over The Next 6-12 Months?

Shippers anticipate rail prices to increase by 3.1% over the next 6-12 months, down 10bps compared to last quarter and still below the five-year survey average of 3.7%. Soft industrial outlook is likely putting a lid on rails’ ability to price. TL spot rates declining back to trough levels has also likely prevented much rail pricing upside.

Question 2a: What Is The Current Price Differential You Are Seeing Between Specific Rail And Truckload Freight Moves (Bulk/Carload)?

39% of respondents indicated that truckload is a cheaper option than rail, up a material 11 points compared to last quarter, the highest reading on record. TL spot deterioration through August and September has prevented rail from seeing any improvement in the differential. Spots are now -17% off early July peak and have returned to freight recession trough levels.

Question 2b: What Is The Current Price Differential You Are Seeing Between Specific Rail And Truckload Freight Moves (Intermodal)?

38% of intermodal shippers answered that truck is cheaper than rail compared to 28% a quarter ago, a 10-point decrease. Results are similar to those observed for the bulk category amid renewed weakness in TL spot rates.

Question 3: How Are You Planning Your Business Around Tariff Uncertainty?

We once again asked shippers about how they are adapting to tariff uncertainty. Notably, 4 percentage point more shippers said they are ordering less while 3 percentage point more shippers attested to pulling forward. Both outcomes point to a modified peak season with the fourth quarter expected to be seasonally soft as inventories are built.

Question 4a: If you had access to a single-line rail service via a transcon rail merger, how much bulk/carload eligible freight would you push towards the railroads?

We asked shippers how much carload freight they would move to rails given access to a single-line network. A little under half of eligible shippers said none. 31% of shippers answered in the 0%-5% range and this was the most frequent response. 15% of shippers answered in the 5%-10% range while 8% see shifts beyond 15%. On a weighted average basis, 3% of freight is contemplated to be shifted at this time. We acknowledge that rails have not yet marketed this service to shippers yet and believe this figure could potentially move up significantly as this service is rolled out and matures.

Question 4b: If you had access to a single-line rail service via a transcon rail merger, how much intermodal eligible freight would you push towards the railroads?

Intermodal results are similar to bulk but notably 5 percentage point more shippers see shifts likely compared to carload.

Question 4c: What are your key concerns regarding a potential rail merger? (select all that apply)

Three quarters of shippers surveyed have concerns regarding monopolistic practices in a consolidated railroad industry, which is unsurprising. The second most cited concern is integration related. Among other concerns cited was reduced customer service and loss of experienced staff.

Question 4d: Do you plan to endorse/oppose a rail merger during STB review (either publicly or in comment period)?

A majority of shippers do not intend to participate in comments with the STB review. Of those that do, however, three times as many intend to oppose the merger than support it. Only 10% intend to endorse the UNP/NSC merger. We remind investors that the STB has historically offered little concessions to shippers (or other Class I’s) formally through the review process and typically agreements have been reached independently between affected shippers and the relevant rails.

Question 5a: Over The Past Quarter, Have You Shifted More Off The Highway To The Railroads?

13% of bulk shippers and 16% of intermodal shippers now report having shifted volumes onto the rails. Declining TL spot rates approaching trough levels once again has put a lid on truck to rail conversions.

Question 5b: If So, Why (Bulk/Carload and Intermodal)?

“Concerns about tight TL capacity,” declined sharply by 8 points among participants that did shift freight which tracks with rate volatility. Participants that cited higher truck prices decreased by 10 percentage points to 22%. 38% of shippers answered, “improved rail service,” up 12 points from last quarter.

Question 6a: Are You Concerned About Rail Capacity?

37% of shippers answered that they are concerned about rail capacity, up 7 percentage points compared to last quarter. These are at 2024 levels but well below COVID congestion levels. About that concern, we asked, “If so, why?” Compared to a quarter ago, 4 percentage point fewer shippers cited “Equipment,” 1 percentage point less for “Track,” and 9 percentage points more answered “Manpower.”

Question 6b: Has Rail Service Impacted Your Modal Choices?

36% of survey respondents report that the quality of rail service has impacted their modal choices down 4 percentage points compared to last quarter.

Question 7a: How Would You Rate The Railroads On Service Measures, Using A Y/Y Comparison?

The average “positive” (excellent or good rating) rating of Class I (including KCS, KCSM, and Ferromex) rail service held flat at 55% in the third quarter. UP was the only declining U.S. Class I relative to the five-year average. This quarter, we again segment KSU’s operations by geography, separating Kansas City Southern (KCS, or KSU’s U.S. railroad) and Kansas City Southern de México (KCSM, or KSU’s Mexico railroad), and including service measure results for Mexican railroad Ferromex.

Question 7b: How Would You Rate The Railroads On Digital Ease Of Use And Freight Visibility?

We asked shippers to rate the Class I’s by digital ease of use and freight visibility as technology becomes an increasingly central part of rails’ efficiency strategies. The average “positive” (excellent or good rating) rating of Class I’s digital ease of use rating was 52% in the third quarter, down 3 percentage points compared to last quarter.

Question 8a: If Rail Service Improves, How Much More Freight Would You Push Toward The Railroads (Bulk/Carload)?

In the bulk/carload category, 67% of survey respondents indicated they would push 0%-5% more freight toward the rails, up vs. last quarter, while the share of those responding they would move 5%-10% decreased by 8 points.

Question 8b: If Rail Service Improves, How Much More Freight Would You Push Toward The Railroads (Intermodal)?

On the intermodal side, 65% of shippers answered 0%-5% more freight would be shifted to rails, 9 points less compared to last quarter. Participants responding that 5%-10% of their freight would be shifted was up 11 points. At the 10%-15% level, responses were up 2 points. Finally, those answering they would move more than 15% of freight decreased by a percentage point sequentially.

Question 9: Have ESG Targets Become A Part Of Your Decision-Making?

Responses that ESG targets were a factor decreased to 20% compared to 22% last quarter. We will continue to monitor trends in this space.

Question 10: Given Current Economic Conditions, How Much Do You Anticipate That Your Business Will Grow Over The Next 12 Months?

Business growth expectations over the next 12 months declined 30bps to reach 1.2%. Growth expectations have now touched the COVID low. Results line up with our channel checks indicating incremental weakness in the industrial economy.

Question 11: Over The Next 12 Months, How Will Your Employee Count Change?

The percentage of shippers expecting their employee counts to increase over the next 12 months was up 4 points sequentially. The percentage of shippers expecting to decrease headcount was up 6 points while those expecting it to be unchanged was down 10 points in the quarter.

Question 12: Is Your Company Having Difficulty Hiring Employees?

We asked participants if their companies are having difficulty hiring employees. Results were up 3 points compared to last quarter with 44% of participants stating that they are having trouble hiring employees, and 47% not having trouble hiring employees.

Question 13: Are You More Confident In The Direction Of The Economy Today Than You Were Three Months Ago?

Economic confidence slipped again in the third quarter and remains well below the survey average with a majority of participants still less confident in the economy.

Question 14: On A Scale Of 1 To 5, 5 Being The Most Positive, How Have Business Levels Trended Over The Last 3 Months?

Business levels over the past few months were positive (“good,” “very good,” or “excellent”) for 33% of respondents, down 5 points compared to last quarter. This figure has also reached the lows seen during the COVID shock amid poor macro outlook.